KUALA LUMPUR: Hong Leong Investment Bank Bhd (HLIB) remains cautious on George Kent (M) Bhd's (GKent) prospects as it anticipates headwinds to persist for its construction segment with questionable near term replenishment prospects compounded by a thin order book.
HLIB said given the scarcity of railway construction contracts in the pipeline, there was limited near term order book replenishment potential.
GKent's outstanding order book, excluding light rail transit 3 (LRT3) contract, stands at RM300 million.
This translates into a cover ratio of 1.22 times of the financial year 2020 construction revenue.
Besides that, HLIB said, construction works for its hospital projects had yet to recommence pending receipt of Covid-19 test results.
"Management revealed that the pace of construction works may not normalise to pre-MCO (Movement Control Order) levels due to SOP (standard operating procedure) guidelines in place.
"Prior to the shift in government, completion timeline for its hospital projects were originally slated to be extended to the first half of 2021 from 2020. Given the pandemic, further extensions to the timeline look likely," it said.
HLIB said GKent's LRT3 order book stood at RM4.6 billion with a completion rate of 24 per cent.
"We reckon it may miss its targeted 40 per cent completion rate by end 2020 due to the MCO.
"Nevertheless, finalisation of the novation agreements have been ongoing and are expected to be concluded in the next couple of months.
"We gather payment for the project has been ongoing despite the MCO," it said.
As for its water metering business, HLIB expects it to normalise by the second half of 2020.
It said GKent's meter utilisation rate now stood at 60 per cent.
"While we foresee increasing pump-priming initiatives by the government moving forward, job awards are unlikely in the short term.
"To combat this, GKent is targeting to grow profit contribution from its metering division to 50 per cent in the short to medium term," it added.
HLIB cut GKent's financial year 2021 earnings by 6.5 per cent after recalibrating progress billings to the financial year 2022.
Hence, its financial year 2022 earnings increase by 27 per cent upon factoring in higher progress billings and margin normalisation.
HLIB also introduced the financial year 2023 earnings forecast of RM30 million.
The firm maintained its "sell" call on GKent with a slightly higher target price of 52 sen from the previous 50 sen.